New Delist­ing Reg­u­la­tions: Is Sebi Play­ing into MNCs’ Hands?

The Economic Times - - Money & Banking -

In propos­ing reg­u­la­tions to pro­tect mi­nor­ity share­hold­ers’ in­ter­est when the dom­i­nant stake holder wants to delist, Sebi looks to strike a bal­ance. Will it ben­e­fit the small share­hold­ers, or le­galise MNCs’ act of de­priv­ing small share­hold­ers a share of In­dia’s growth pie, asks ReenaZachariah

hances of a mar­ried cou­ple sit­ting across the ta­ble, with one say­ing, “I want a di­vorce,” and the other say­ing, “Fine, let’s go ahead,” are im­prob­a­ble. Usu­ally, one spouse sets the ball rolling on a sep­a­ra­tion while the other re­sists. The per­son who re­sists will ei­ther reluc­tantly let go or will fight it out but not with­out seek­ing his or her due share. Sim­i­larly, when pro­mot­ers at­tempt to delist their com­pa­nies, mi­nor­ity share­hold­ers of­ten re­sist such moves but with no suc­cess. “Delist­ing is like a forced di­vorce,” a se­nior cap­i­tal mar­ket reg­u­la­tory of­fi­cial said at a meet­ing. “The in­vestor has the right to ask what is due to him. If the pro­moter can pay, go for di­vorce. If you are not able to pay, re­main listed.” Sebi’s stance on this stems from its con­cern for mi­nor­ity share­hold­ers whom it reck­ons should not lose out in the bar­gain. Delist­ing, which leads to the re­moval of a com­pany’s stock from the bourses favours pro­mot­ers, en­abling them to ex­er­cise greater con­trol over the businesses. Once the stock is delisted, mi­nor­ity share­hold­ers will not en­joy the lux­ury of liq­uid­ity of­fered by stock ex­changes. So the reg­u­la­tor wants to en­sure that such share­hold­ers gain the most be­fore delist­ing. With this in mind, a few weeks ago, Sebi pro­posed re­vamp­ing the five-year-old delist­ing rules. The reg­u­la­tor’s in­ter­nal anal­y­sis of 38 delist­ing of­fers be­tween 2009 (when Sebi in­tro­duced delist­ing reg­u­la­tions) and 2014 re­vealed that 29 of­fer­ings were suc­cess­ful (dif­fer­ently put, al­most 24% failed). The anal­y­sis showed that some of the delist­ing of­fers suc­ceeded be­cause of a tacit un­der­stand­ing be­tween pro­mot­ers and in­vestors while some failed as the exit price dis­cov­ered through the re­verse book build­ing (RBB) process was un­duly in­flu­enced by spec­u­la­tors. In both cases, mi­nor­ity in­vestors were left in the lurch. “The more re­cent ex­pe­ri­ence with delist­ing has been that a few share­hold­ers hold out for a higher price, hold­ing the process to ran­som,” said Amit Tan­don, founder and MD of IIAS, a proxy ad­vi­sory firm.

To gain a bet­ter pic­ture of the delist­ing sce­nario, the 38 of­fers need to be clas­si­fied into two dis­tinct buck­ets — those re­lat­ing to MNCs and the ones re­lat­ing to In­dian com­pa­nies. A fur­ther anal­y­sis of the data showed that 12 of the 19 MNC of­fer­ings were suc­cess­ful (which also means that 40% failed) and in case of In­dian of­fers, 17 out of 19 suc­ceeded (the fail­ure rate be­ing 11%). More­over, the aver­age pre­mium (dif­fer­ence be­tween exit price and floor price) in MNC of­fers was three times the pre­mium for In­dian com­pa­nies. The high pre­mium is also be­cause the In­dia units have emerged as a jewel in the crown of MNCs businesses even as they grap­ple with slow growth in their home coun­tries. Le­nient FDI rules and re­moval of caps in many sec­tors too have al­lowed MNCs to hold a tighter grip over their lo­cal arms. In HSBC In­vestDirect’s delist­ing of­fer, the exit price was ` 400 against the floor price of ` 124, a su­per pre­mium of 223%. Fur­ther, in case of seven In­dian com­pa­nies, the pre­mium to floor price was 0%, which means in­vestors ten­dered at the floor price de­spite the RBB mech­a­nism al­low­ing them to bid higher. In con­trast, in MNC of­fers there was not a sin­gle of­fer where the exit price was at 0% pre­mium to the floor price. “The re­mark­able di­ver­gence in trend with higher num­ber of suc­cess­ful of­fers by In­dian com­pa­nies that too at lower pre­mi­ums points to mar­ket re­al­i­ties that need to be recog­nised be­fore gen­er­al­is­ing,” said Me­hul Savla, di­rec­tor, Rip­pleWave Eq­uity Ad­vi­sors. Sebi is con­sid­er­ing a host of re­forms such as mod­i­fi­ca­tion of RBB process, manda­tory ten­der by min­i­mum num­ber of share­hold­ers or shares and in­tro­duc­tion of a fixed price mech­a­nism and counter of­fers in an at­tempt to fa­cil­i­tate a fair and trans­par­ent exit price for small share­hold­ers. “The draft Sebi guide­lines — of­fer­ing a broader set of price dis­cov­ery op­tions, at­tempts to tilt the bal­ance from a hand­ful to a larger set of share­hold­ers,” said Tan­don of IIAS. In the pro­posed RBB process, the exit price will be de­ter­mined based on the price at which share­hold­ers rep­re­sent­ing a req­ui­site num­ber of shares ten­dered are will­ing to exit. In such an ap­proach, the bid of each share­holder counts un­like the cur­rent sys­tem where only the bid of the largest share­holder counts. Yogesh Chande, as­so­ciate part­ner at Eco­nomic Laws Prac­tice feels that al­low­ing re­tail in­vestors to bid at the cut-off price sim­i­lar to an IPO process will be help­ful com­pared to the RBB process. “The cut-off price has per­sua­sive value for re­tail in­vestors, as has been the ex­pe­ri­ence in case of an IPO,” Chande said. How­ever, Savla of Rip­pleWave has a dif­fer­ent view on cut-off price. “In an IPO, this makes sense since IPOs re­quire min­i­mum 60% par­tic­i­pa­tion from QIBs who are so­phis­ti­cated in­vestors with good re­search skills and are well equipped to do the pric­ing of an IPO. In delist­ing such a fa­cil­ity

Cshould not be al­lowed.” To en­sure a high suc­cess rate, Sebi plans to al­low ac­quir­ers to make counter of­fers. If the exit price is at a sig­nif­i­cant pre­mium to the floor price, which is un­ac­cept­able to the pro­moter, the ac­quirer will have the op­tion to make a counter of­fer. Reg­u­la­tory data showed that ac­quir­ers had re­jected the exit price or dis­cov­ered price in a few of­fers. Some an­a­lysts are of the view that un­like the RBB mech­a­nism, which is not fol­lowed in most de­vel­oped mar­kets, Sebi’s move to al­low com­pa­nies launch delist­ing of­fers at a fixed price will be a good step. “This is the best op­tion as it is demo­cratic and un­less enough in­vestors par­tic­i­pate the of­fer would any­way fail. Since it is a fixed price of­fer, old in­vestors do not have the con­fu­sion re­lated to RBB and may pre­fer to par­tic­i­pate rather than sell in the mar­ket,” Savla said. “The con­cern of com­pa­nies tak­ing ad­van­tage of bad mar­kets to delist at a lower price is valid. But in­vestors have the right not to par­tic­i­pate in such times if they be­lieve in the long term po­ten­tial of the com­pany. By the same logic, if a com­pany does an IPO in a ris­ing mar­ket and then later mar­kets de­cline leading to a fall in share price, should IPOs be dis­al­lowed in such mar­kets so that in­vestors do not lose money?,” counters Savla. There were in­stances of MNCs short-chang­ing mi­nor­ity in­vestors. Fre­se­nius Kabi On­col­ogy, a health­care firm, was ac­cused by the reg­u­la­tor of col­lud­ing with in­vestors to en­sure that it delisted the firm. Since it could not delist at first, the con­trol­ling share­holder sold some shares to a bunch of in­vestors who in turn sold them back to the pro­mot­ers en­abling them to delist the stock.

Sebi’s move to freeze trad­ing dur­ing the last three days of the of­fer pe­riod could stem vo­latil­ity in the ten­der­ing process, bro­kers said. Also the plan to al­low de­pos­i­tory re­ceipt hold­ers to ten­der their shares, pro­vided the ben­e­fi­cia­ries are known, could boost pub­lic par­tic­i­pa­tion in delist­ing. Sebi is also con­sid­er­ing short­en­ing the time­line re­quired to com­plete the delist­ing ac­tiv­ity to 64 days from 137. In­vestors may also be al­lowed to ten­der shares through the stock ex­change plat­form against the RBB sys­tem of ten­der­ing shares through an off-mar­ket deal. Ten­der­ing of shares through RBB at­tracts higher cap­i­tal gains tax com­pared to a trans­ac­tion through the stock ex­change which at­tracts the nom­i­nal se­cu­ri­ties trans­ac­tion tax. “Al­low­ing de­posi­tary hold­ers to par­tic­i­pate, mak­ing the ex­change plat­form avail­able, a tighter time-line, a sin­gle thresh­old, all tell us that Sebi is lis­ten­ing to the mar­ket,” said Tan­don. Chande of Eco­nomic Laws Prac­tice sug­gests that Sebi could con­sider bring­ing back the con­cept of delist­ing pur­suant to the rights is­sue. “If as a re­sult of the rights is­sue, the pub­lic share­hold­ing re­quired to be main­tained for con­tin­u­ous list­ing in the com­pany falls be­low the pre­scribed lim­its, the com­pany will com­ply with the pro­vi­sions of the delist­ing reg­u­la­tions by of­fer­ing to buy out the re­main­ing hold­ers at the price of the rights is­sue and as a re­sult of which the shares of the com­pany will be delisted.”All these sug­ges­tions ap­pear to be sen­si­ble, but the chal­lenge for the reg­u­la­tor will be to strike a bal­ance be­tween se­cur­ing a fair deal for mi­nor­ity share­hold­ers and for a com­pany to pur­sue a cer­tain course in an open econ­omy, with­out jeop­ar­dis­ing the in­ter­ests of stake­hold­ers.

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